Explicit Costs vs Implicit Costs
Explicit Costs and Implicit Costs are two Production & Costs concepts in AP Economics that students often mix up. In short: explicit costs is explicit Costs are direct, out-of-pocket payments made by a firm for inputs purchased from others. Meanwhile, implicit costs is implicit Costs are non-monetary opportunity costs of using the firm’s own resources. Here is how they compare side by side.
Explicit Costs are direct, out-of-pocket payments made by a firm for inputs purchased from others.
These include wages, rent, and raw material expenses that involve actual cash transactions and are recorded in accounting records. They are part of both accounting and economic profit calculations.
Implicit Costs are non-monetary opportunity costs of using the firm’s own resources.
These include the foregone salary of the owner working in the business or the rent that could have been earned by leasing owned property. Implicit costs are included in economic profit but not in accounting profit.